Bank of Canada Raises Overnight Rate by 1%
July 14, 2022 | Posted by: Michael Boccia
The Bank of Canada (BoC) announced an additional 100 Basis Point Rate (1 percent) increase in the overnight lending rate.
This will lead to Prime rates being changed at Canada’s major banks to 4.70%, up 100 bps from the current prime rate of 3.7%. This large increase is due to CPI inflation remaining elevated at 7.7%, a 40year high. This is above the forecast of around 6% of the first half of 2022.
The BoC’s Quantitative tightening (QT) began on April 25, 2022. And since then has raised the overnight rate by 2.5%
So what does this mean to you?
Well if you have a fixed rate mortgage, it does not affect you today. How this will affect you is if you are in a position to renew your current mortgage in the near future, you will have higher rates than you currently have.
If you have an adjustable rate mortgage, the kind that the payment changes when there is a change in Prime rate. Well your payment will increase approx. $52 for every $100k that you have in mortgage.
If you have a variable rate mortgage that the payment remains static i.e. does not change with changes in prime rate, well you may be approaching what is called the trigger rate. This is when your payment no longer covers the interest owed. If this occurs, the lender will ask you to increase your payment and or make a lump sum payment. In order to avoid or reduce the burden of this trigger rate scenario, I recommend increasing your payment by at least $52 per $100k of mortgage right now.
Many of you in a variable rate mortgage are concerned about the recent increases and potential further increases? Well you do have some options.
1) Make NO change - Ride the Wave. Just as rates are increasing, they will decrease at some point as well. You still enjoy better rates than current fixed mortgages and enjoy all the benefits and flexibility that a variable rate mortgage gives you.
2) Consider converting to Fixed - Lenders will allow you to convert your variable mortgage into a fixed rate mortgage without penalty. Current fixed rates are between 5%-6%
Make sure to consult with your mortgage broker before you take this option so you can actually shop the market because there could be other solutions
3) Re-Structure to a 1-3 year fixed offering. This could be a great option to capture lower rates at renewal if rates come down with signs of an impending recession in 1-3 years
4) Transfer your adjustable rate mortgage to a static payment Variable - Subject to qualification - and keeping in mind there is a trigger rate
5) Consider a HELOC - Home Equity Line of Credit only requires interest payments and ultimately can provide greater cash flow to those who are less concerned about interest and more concerned about monthly payments or perhaps investors looking to continue to cash flow.
So just to recap
Is it the payment you're concerned about, or the interest? If it is the payment, consider talking to us about a VRM mortgage (static payment).
If it is the interest, you will pay more in interest with a fixed rate which is higher if you were to switch today
If you are in static payment, consider increasing your payment to account for the increase in rates.
Book a call with me today to discuss your current financing and if a better option exists